Party struggles for money and muscle in fight for fourth term

As it prepares to fight for a fourth consecutive term in power, the Labour party machine is in trouble. Ministers, officials, union leaders and ordinary members all admit privately that it has never seemed weaker or worse prepared for the task. Yet few people are ready to give up yet. "I still don't think it's game over," says a former minister, no supporter of Gordon Brown.

Labour's 12 years in office - scarred by an Iraq war that drained support and a "cash for peerages" affair that has made it much more difficult to raise new private donations - have left it short of two of the key ingredients for election success: money and manpower. While the Tories' target seats are being pumped full of cash by their deputy chairman Lord Ashcroft, Labour remains between £16m and £18m in debt.

Equally alarming is its drop-off in membership. The last published figure, at the end of 2007, was 176,891. When Tony Blair became leader in 1994 it was 305,189 and the figure rose to 405,238 after the party won power. Labour will not say officially how many members it has, only that the number is "steady". NEC sources say there was a surge in the months after Brown took over in 2007 but that since then numbers have dropped by around 10%, suggesting the figure now stands at about 160,000.

In some constituencies where Labour still hopes to put up a reasonable fight local parties have only around 200 fee-paying members, nowhere near enough to mount a decent campaign. "It would be fair to say it is all pretty dreadful," says a senior minister. "In large parts of the country there is virtually nothing there."

All this means that a party that came into power keen to limit its reliance on union cash is more dependent on it than ever. Staffing levels at the party's Victoria HQ are at skeletal levels. There is virtually no money for the private polling or advertising that New Labour used so effectively at its peak. "Even decisions about spending the odd £100 are a big deal," says one party figure.

The new general secretary, Ray Collins, a former union official, has imposed some sort of order on the crisis since arriving last year in the aftermath of "cash for peerages". At that time the party was staring at bankruptcy as the businessmen who lent it £14m before the 2005 election asked for their money back. Then total debt topped £24m. Collins just managed to avert disaster by agreeing a two-year "interest rate holiday" with seven of the businessmen who extended the terms of their loans. The party also signed up to a plan to repay £9.2m by 2015.

The Unite super-union offered help, forking out £2m extra, while other supporters converted a further £3.2m of loans into donations. Collins's prompt action averted catastrophe but did not solve the basic problem. "What 'cash for peerages' did was make any potential donor think their name would be dragged through the press if they went anywhere near us," says an NEC member. To reassure potential donors Collins put in place an entirely new financial structure. Any new donations now go toward towards campaigning - and campaigning only. Donors' money cannot be flushed away on paying for past mistakes.

Debt repayment, meanwhile, is now funded by commercial activity such as conferences and sponsorship, while day-to-day operations are paid for out of recurring membership and affiliation fees from unions and other affiliated organisations. This brings in a reasonably assured income of around £5m a year. Jon Mendelson, who is to Gordon Brown what Lord Levy was to Tony Blair, managed to extract £1m for Labour from JK Rowling last autumn, before Lord Sainsbury followed up with £500,000 in December. Insiders say things have "stabilised".

With little money to spend and David Cameron's Tories well ahead in the polls, Labour officials and election planners know the cards are stacked against them.